Keynes v Hayek, Obama v Romney

I initially posted this at maclectic/Forums/politics on Jan 29, 2010. Barack Obama had just completed his first year, and Nancy Pelosi and Harry Reid set the stage in Congress:

Yesterday the Senate approved raising the debt ceiling another 1.9 Trillion across a party-line vote. Had it not passed, the fall-back plan was to approve the 635 Billion already approved by the House. Naturally, raising the ceiling again wouldn’t look good next fall right before the mid-term elections, so our fearless Senate simply doubled down on the ceiling.

Following WWI, two major and opposing “schools” of economics appeared.

The first was known at the time as “classic liberalism” today we know it as the Austrian School. Ludwig Von Mises and F.A Hayek were major proponents. The prime tenets of this economic theory was that individuals, and their contributions can create wealth and add value to society more efficiently with the least amount of government interference and control. The Chicago School which Milton Freidman spear-headed is an off-shoot in a sense of the Austrian School of thought. Today in the US at least, most folks who align with this theory are generally regarded as conservatives in an economic sense. In parts of Europe and academia they are still known as “classic liberals” which should not be confused with the progressive movement.

Second, at about the same time, John Maynard Keynes was developing his progressive economic theories in London. He believed that money or wealth would always be in a constant fixed supply, and that governments could control markets by controlling the money supply. This theory punished producers with excessive taxes, a policy which created a self-fulfilling prophecy, and producers found ways to reduce their output, since punitive taxes also reduced individual incentive to create and produce goods and services.

Keynesian Economics also held that governments could artificially stimulate an economy by pumping up the money supply, also known as printing money. Governments also used such gimmicks to deflate the value of their currency in order to pay international debts at lower than agreed to rates. This is known as monetizing debt. The US, England and Germany all used the Keynesian theory to print money to prop up their respective economies after the Great Depression (in Germany’s case beforehand). The Weimar Republic printed so much currency in order to pay off punitive WWI war-debts that the government finally collapsed which led to the rise of the Third Reich.

Sadly, the Keynesian School was known as gospel in most governments in the West for much of the 20th century with a few exceptions. It is making a strong come-back today. We are monetizing our debt, something that the Chinese and Arabs are not looking fondly upon, since they now hold such a large part of it.

Today, our government is creating the most forceful shift to failed Keynesian theories since the days of FDR and his progressive vision which we are all still paying for today. Governments can not create wealth, they can only confiscate it regardless of the amount of currency they are printing.

It still takes individuals and producers willing to risk, to create and innovate to create wealth, it is not a static target. We should go back to creating an environment which rewards instead of demonizing the risk-takers, and the producers of the world. We will all be richer for it in the long run.

I’m not a big fan of hip-hop, or rap as we used to call it. This is a very entertaining rap production of an imagined meeting of Keynes and Hayek during current times. It is very well produced, and brings into contrast the two major economic schools of thought in a creative way. I hope you enjoy it.

In Fear the Boom and Bust, John Maynard Keynes and F. A. Hayek, two of the great economists of the 20th century, come back to life to attend an economics conference on the economic crisis. Before the conference begins, and at the insistence of Lord Keynes, they go out for a night on the town and sing about why there’s a “boom and bust” cycle in modern economies and good reason to fear it.

About 6:30 running time with an additional 60 seconds of credits.

Hit the read more for lyrics, and additional links.

Here are the complete lyrics. Sing along!

We’ve been going back and forth for a century

[Keynes] I want to steer markets,

[Hayek] I want them set free

There’s a boom and bust cycle and good reason to fear it

[Hayek] Blame low interest rates.

[Keynes] No… it’s the animal spirits

John Maynard Keynes, wrote the book on modern macro

The man you need when the economy’s off track, [whoa]

Depression, recession now your question’s in session

Have a seat and I’ll school you in one simple lesson

BOOM, 1929 the big crash

We didn’t bounce back—economy’s in the trash

Persistent unemployment, the result of sticky wages

Waiting for recovery? Seriously? That’s outrageous!

I had a real plan any fool can understand

The advice, real simple—boost aggregate demand!

C, I, G, all together gets to Y

Make sure the total’s growing, watch the economy fly

We’ve been going back and forth for a century

[Keynes] I want to steer markets,

[Hayek] I want them set free

There’s a boom and bust cycle and good reason to fear it

[Hayek] Blame low interest rates.

[Keynes] No… it’s the animal spirits

You see it’s all about spending, hear the register cha-ching

Circular flow, the dough is everything

So if that flow is getting low, doesn’t matter the reason

We need more government spending, now it’s stimulus season

So forget about saving, get it straight out of your head

Like I said, in the long run—we’re all dead

Savings is destruction, that’s the paradox of thrift

Don’t keep money in your pocket, or that growth will never lift…

because…

Business is driven by the animal spirits

The bull and the bear, and there’s reason to fear its

Effects on capital investment, income and growth

That’s why the state should fill the gap with stimulus both…

The monetary and the fiscal, they’re equally correct

Public works, digging ditches, war has the same effect

Even a broken window helps the glass man have some wealth

The multiplier driving higher the economy’s health

And if the Central Bank’s interest rate policy tanks

A liquidity trap, that new money’s stuck in the banks!

Deficits could be the cure, you been looking for

Let the spending soar, now that you know the score

My General Theory’s made quite an impression

[a revolution] I transformed the econ profession

You know me, modesty, still I’m taking a bow

Say it loud, say it proud, we’re all Keynesians now

We’ve been goin’ back n forth for a century

[Keynes] I want to steer markets,

[Hayek] I want them set free

There’s a boom and bust cycle and good reason to fear it

[Keynes] I made my case, Freddie H

Listen up , Can you hear it?

[Hayek]I’ll begin in broad strokes, just like my friend Keynes

His theory conceals the mechanics of change,

That simple equation, too much aggregation

Ignores human action and motivation

And yet it continues as a justification

For bailouts and payoffs by pols with machinations

You provide them with cover to sell us a free lunch

Then all that we’re left with is debt, and a bunch

If you’re living high on that cheap credit hog

Don’t look for cure from the hair of the dog

Real savings come first if you want to invest

The market coordinates time with interest

Your focus on spending is pushing on thread

In the long run, my friend, it’s your theory that’s dead

So sorry there, buddy, if that sounds like invective

Prepare to get schooled in my Austrian perspective

We’ve been going back and forth for a century

[Keynes] I want to steer markets,

[Hayek] I want them set free

There’s a boom and bust cycle and good reason to fear it

[Hayek] Blame low interest rates.

[Keynes] No… it’s the animal spirits

[Hayek] The place you should study isn’t the bust

It’s the boom that should make you feel leery, that’s the thrust

Of my theory, the capital structure is key.

Malinvestments wreck the economy

The boom gets started with an expansion of credit

The Fed sets rates low, are you starting to get it?

That new money is confused for real loanable funds

But it’s just inflation that’s driving the ones

Who invest in new projects like housing construction

The boom plants the seeds for its future destruction

The savings aren’t real, consumption’s up too

And the grasping for resources reveals there’s too few

So the boom turns to bust as the interest rates rise

With the costs of production, price signals were lies

The boom was a binge that’s a matter of fact

Now its devalued capital that makes up the slack.

Whether it’s the late twenties or two thousand and five

Booming bad investments, seems like they’d thrive

You must save to invest, don’t use the printing press

Or a bust will surely follow, an economy depressed

Your so-called “stimulus” will make things even worse

It’s just more of the same, more incentives perversed

And that credit crunch ain’t a liquidity trap

Just a broke banking system, I’m done, that’s a wrap.

We’ve been goin’ back n forth for a century

[Keynes] I want to steer markets,

[Hayek] I want them set free

There’s a boom and bust cycle and good reason to fear it

[Hayek] Blame low interest rates.

[Keynes] No it’s the animal spirits

“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”

John Maynard Keynes: The General Theory of Employment, Interest and Money

“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.

F A Hayek: The Fatal Conceit

Links:

The particular occasion of this lecture, combined with the chief practical problem which economists have to face today, have made the choice of its topic almost inevitable. On the one hand the still recent establishment of the Nobel Memorial Prize in Economic Science marks a significant step in the process by which, in the opinion of the general public, economics has been conceded some of the dignity and prestige of the physical sciences. On the other hand, the economists are at this moment called upon to say how to extricate the free world from the serious threat of accelerating inflation which, it must be admitted, has been brought about by policies which the majority of economists recommended and even urged governments to pursue. We have indeed at the moment little cause for pride: as a profession we have made a mess of things.

2 Responses to Keynes v Hayek, Obama v Romney

Once upon a time, 2 friends, Paul & Barry, decided to start a business.
They bought pumpkins in the country for $1 apiece.
Then they went to town to sell them for $1 apiece.
Halloween was just a few days off and sales were brisk.
“Looks like we’re STIMULATIN’ the ECONOMY!” shouted Paul, the excitable partner.
“Yes, indeed,” Barry agreed.
And before sunset, all the pumpkins were sold!
But that night, after working the books, Barry said: “Mr. Krugman, I have bad news, we’re not making any money.”
To which Paul replied: “Dammit, Mr. Obama — I told you we needed a bigger truck!”